RBI guv goes head held high

Raghuram Rajan had to go as governor of Reserve Bank of India for refusing to execute the government’s demonetisation plan. On Monday, his successor Urjit Patel too stepped down protecting the central bank’s independence.

Following months of charges and counter-charges, it finally boiled down to this – the RBI board is scheduled to meet on December 14 with a single point agenda to change the bank’s governance structure. The government wants the RBI governor to be accountable to the board. Patel, obviously, was opposed to the idea.

Under the current structure, the bank has four deputy governors, four directors from the RBI’s local boards, two government nominees and others appointed by the government -- overall 18 directors.

However, the role of the board currently is consultative. The final word in any policy decision is that of the governor. Having failed to make successive governors bend to its demand, the government now wants to weaken the governor’s position.

The tussle that prompted the December 14 meeting is not the first instance of the government’s run-in with Patel. Unlike Rajan, the government gave no choice to Patel on demonetisation. Just a couple of months after assuming office, he was presented with the designs of the new currency notes to put his signature on. It was a fait accompli.

Even after the absolute failure that demonetisation was, the government was not willing to accept its folly. When it was first informed that nearly all demonetised currency notes had been returned to the bank, it asked for a recount. The recount came up with the same result – 99.3 per cent of demonetised notes were back in RBI’s treasury.

Then in October this year, RBI’s deputy governor Viral Acharya, in a lecture, warned about excessive interference in RBI functioning by the government. He was referring to two or three government-RBI flash points, though he did not spell them out in his lecture. The government wanted the norms governing financing of micro, small and medium enterprises (MSME) eased.

The government also wanted the RBI to hand over a substantial part of the Rs 9.69 lakh-crore reserves as an additional dividend to it to meet its fiscal targets. It also wanted the RBI to ease the liquidity crunch faced by non-banking financial companies.

At the November 19 meeting to discuss the government’s demands an agreement was reached — the RBI board agreed to form a committee to look into the issue of transferring RBI’s reserve to the government; it also agreed to consider the issue of restructuring MSME loans where the amount due was not above Rs 25 crore. The issue of capital adequacy ratio for banks was also resolved to the RBI’s satisfaction with the government backing off. However, the government was still left dissatisfied. And thus came the demand to fundamentally change how the RBI board functioned, making it more pliant to Delhi. And that is when Patel decided to say enough was enough.

Well-known financial markets author-columnist Tamal Bandyopadhyay said the idea of making the RBI governor answerable to the board would work only if the board comprised top-drawer economists.

“Does the RBI’s board have the requisite competence and skill? Do these directors have the expertise in central banking? The Federal Reserve of United States, which is board driven, has appointees such as former governor of Israel’s central bank, former chief economist to IMF, and former partner of one of the largest private equity firm Carlyle among others. So, if the government wants RBI to be board driven then it must also understand its responsibility to appoint people with deep and broad understanding of economy and financial markets.”

POLLHas Urjit Patel done the right thing by resigning as RBI Governor?

YesNoCan't say

VOTE

The fact is that a majority of appointments to the RBI board are political. The sacking of RBI Director Nachiket Mor by the Centre at the behest of Sangh Parivar outfits like Swadeshi Jagran Manch is a case in point. A senior finance sector professional, who did not wish to be identified, said: “Patel, who I knew since 1990s, is shy and reticent, but he has a mind of his own. He would communicate clearly, whatever he wanted to say. His quiet demeanor was perhaps mistaken for a sign of his weakness by the government.”

Gautam Chikarmane, vice-president Observer Research Foundation, in a paper published on Sunday, said communication between the bank and the government collapsed in the past couple of months.

“Evidently, the RBI and the MoF were not talking to each other about monetary policy, lending norms or regulatory issues. Rather, they were talking at each other, using innuendos and attacks, with the media as interlocutors. What could have been resolved within the walls of North Block and Mint Street, became a public brawl. The focus of both the institutions had shifted away from delivering governance to protecting their turfs.”

In an interview to ET Now immediately after Patel’s resignation, Raghuram Rajan said: “The act of resignation by a government servant or a regulator is really a note of protest. It is saying that the person cannot stay on given the kinds of policies that are being thrust upon them. It is really the only act that they have in their reservoir when faced with circumstances they cannot deal with. So, in that sense this should be a statement of protest and given that and given that Dr Patel is very honourable civil servant in some sense and a regulator I think we need to understand what prompted this act and I do not think Dr Patel is given to act in lightly, so I think the government must note.”

Simmering tensions

Although disagreements between the RBI and the Centre aren’t new, a series of disputes led to the latest tussle

• The govt reportedly wants RBI to allow ailing state-owned banks, dealing with bad loans, to resume lending to small businesses..
• It also apparently wants RBI to lower interest rates to inject liquidity into the economy..
• Some reports say it wants to access the RBI’s surplus reserves of Rs 9.69 lakhcrore as well..
• A major cause of conflict is Section 7 of the RBI Act, which empowers the government to issue directions to the central bank as a “last resort”. The government reportedly wants to use the provision—which has never been used before—to control lending rates and get its hands on RBI coffers. RBI maintains that such a step would throw the country’s economy into disarray should a financial emergency arise

The showdown

• The face-off spilled over into public sphere in Oct-end, when Deputy Governor Viral Acharya delivered a fiery speech—perceived as a broadside at the Centre—flagging risks to RBI’s independence..

• The Centre and the RBI thereafter held several board discussions..
• At the last board meeting on Nov 19—which lasted 9 hours— an uneasy peace was established after both seemed to have reached a truce over liquidity concerns and lending restrictions

Recent Messages ()

Please rate before posting your Review

OR PROCEED WITHOUT REGISTRATION

Share on Twitter

SIGN IN WITH

Refrain from posting comments that are obscene, defamatory or inflammatory, and do not indulge in personal attacks, name calling or inciting hatred against any community. Help us delete comments that do not follow these guidelines by marking them offensive. Let's work together to keep the conversation civil.